Compliance

Legislators in Need of Cooling-Off Period

June 1, 2009
• by Michael Benoit

On May 12, Congress held a hearing on a bill that would give
the Federal Trade Commission broad new powers to regulate automobile dealers.
The bill, H.R. 2309, directs the FTC to adopt rules that prevent unfair and
deceptive practices by dealers regarding credit and lending. While certainly
well-intentioned, the bill would severely curtail consumers access to their
cars — while making it next to impossible for you to operate your business.

Under the proposed legislation, the FTC must consider
adopting rules that would:

· Give consumers the right to rescind a sales
contract within a specified period after receiving the final information
regarding the terms of the sale or financing (e.g., a three-day “cooling off”
period).

· Limit the ability of dealers to receive
compensation for arranging financing or assigning a credit contract based on
the interest rate, the annual percentage rate, or the amount financed (i.e.,
restrictions on dealer participation).

Restricting post-sale changes in financing terms not only
impacts dealers who spot deliver, but finance companies as well. The bill’s
broad language would cover servicing activities, such as term extensions,
rewrites, payment schedule modifications, etc. These activities allow
distressed consumers to continue in their contracts and keep their cars.
Without them, repossessions will increase and consumer options in times of need
will be greatly limited.

Giving the consumer the right to cancel a sale sounds good
in theory, but fails in practice. Car purchases are rarely impulsive buys. We
know that by the number of people who come into the store armed with data from
Edmunds.com and other research services. And once a decision is made, consumers
are rarely inclined to wait. They want their new car. Unfortunately, a “right
to cancel” is likely to take the form of a multi-day “waiting period” that no
one will like.

Why? As a practical matter, you’re not going to let the
consumer drive off in their new car until the waiting period expires to avoid
titling issues. Of course, you could let them drive their trade during the
waiting period, but what if it suffers a significant loss in value during that
time? Then you have to rewrite the deal, which will either violate the
restriction on post-sale changes in financing terms or restart the cooling off
period.

And what if you deliver the vehicle before the waiting
period expires? A vehicle sold as “new” but returned during the waiting period
may have to be reclassified as “used,” which would lower its value. Would you
view that as an undue financial burden? I would. My suggestion is that if
Congress is so sure this cooling off period will benefit consumers, give them
the opportunity to waive it.

Despite the negative testimony at the hearing, there is
little data to suggest the existing method for computing dealer compensation
has been abused or unfair to consumers. Today, rate markups tend to be capped,
and consumers are, or should be, well informed that they can negotiate rates.

The bill’s prohibition on certain forms of dealer
compensation seems to conclude that the consumer will receive a financial
benefit because you get paid less. That’s likely true, but they’ll need to show
up at the dealership with their own financing — as the days of dealer F&I
will be over. Not only will many consumers be left without the ability to get
financing, but those that do will have to work outside the dealership to find a
direct lender to finance the purchase. This is bad enough for A-paper
customers, but potentially devastating for the myriad of customers who don’t
have access to traditional banking relationships.

One would think Congress would be sensitive to the impact
this bill could have on your business, but recent events with Chrysler and GM
might also lead one to conclude that Congress isn’t much concerned with you. In
any event, if this bill causes you to lose sleep at night, let your
Congressperson and your trade associations know.

Michael Benoit is a
partner in the Washington, D.C., office of Hudson Cook LLP. He is a frequent speaker and
writer on a variety of consumer credit topics. He can be reached at [email protected]. Nothing in this article is intended to be legal
advice and should not be taken as such. All legal questions should be addressed
to competent counsel.

Dealers and F&I professionals from across the nation gathered at the Caribe Royale Orlando on Monday, Oct. 8, for Compliance Summit 2018. Attendees enjoyed a full day of advanced training, keynotes, and networking sessions, followed by Automotive Compliance Education (ACE) certification on Tuesday.

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